When an investment or asset is sold for less than its purchase price. Recognized losses may be reported for income tax purposes and then carried over into future periods.

Recognized capital losses can be used for effective tax planning strategies. For example, if an investor has taxable capital gains for a given year of $10,500 and is able to recognize a loss on another investment for $2,500, this loss can be applied against the taxable capital gains. Therefore, this investor's net taxable capital gains for the year are $8,000 rather then $10,500.